Alison Velez Lane practices law in Maryland and teaches at Baltimore City Community College. Her business practice includes advising clients on a variety of business-related contractual relationships, often helping entrepreneurs learn the ropes.
Q. Is legal advice always necessary when starting a business?
A. There is a fundamental difference between starting a business and succeeding at business. Entrepreneurs who plan for success should consult with a corporate attorney.
Definite questions on a new business owner's list would include: What sort of business entity best meets my operational and tax considerations? Does the line of business or profession require a license? Is the location for my new business properly zoned? What type of agreements will assist in reaching my goals and objectives?
In your experience, what are the most common types of legal trouble entrepreneurs find themselves in when they start a new business?
Most of the trouble stems from lack of money and failure to understand legal documents. Some business owners do not meet their revenue goals and thus do not pay their financial obligations on time or at all. A business plan and competent legal advice can prevent these ills.
Beware of signing personal guarantees and long-term leases. Understand tax and employment law issues before you hire. Most agreements are negotiable prior to signing on the bottom line. Renegotiation and litigation after developing a bad rapport with creditors is costly, painful and keeps you from doing business.
Does leaning on friends and family to help fund a new business have its own kind of legal dangers?
The support of friends and family is great. Be careful not to overextend your friends' and family's resources by subjecting assets to risky ventures. Also, pay your obligations with the discipline that you would other creditors. Money can destroy relationships.
Are there some basic legal guidelines that entrepreneurs should follow when dealing with potential investors?
Legal counsel is essential for determining guidelines with investors. First of all, think about what you want out of the relationship and what you are willing to offer in return. Possible returns include an ownership interest in your company, a percentage of profits and possible takeover of your business.
Properly drafted documents with default, limitation and termination clauses will protect your interests. Failure to fully document the investment may endanger your ownership of the company.
Should all agreements be written down? When is it okay to rely on verbal commitment?
Yes. It is very expensive to convince a judge that a contract exists unless it's on paper. Relying on a verbal commitment is okay when you are willing to defer to "he said," "she did not say" and "I do not remember."
Written agreements provide a document that all interested parties can use for reliance and referral. A contract should provide for what you want to happen when things go according to plan, and when they do not.
I would recommend that sole proprietors prepare and follow written agreements for the organization and operation of their companies. Orientation, review and update of these policies are crucial and important.
Is the legal environment often hostile to new business ventures?
Well-structured, -funded and -operated businesses have the weapons to overcome the hostility. The legal environment consumes businesses which do not follow the legal rules for organization, operation and compliance. Remember, there is safety in a council of advisers.